Understanding European unemployment with a representative family model

A representative family model with indivisible labor and employment lotteries has no labor market frictions and complete markets. Nevertheless, its aggregate responses to an increase in government supplied unemployment insurance (UI) and to an increase in microeconomic turbulence are qualitatively similar to those in two macromodels with labor market frictions and incomplete markets, namely, the matching and search-island models in Ljungqvist and Sargent [2007a. Understanding European unemployment with matching and search-island models. Journal of Monetary Economics, this issue]. Because there is no frictional unemployment in the representative family model, an increase in employment protection (EP) decreases aggregate work because the representative family substitutes leisure for work, an effect opposite to what occurs in matching and search-island models. Heterogeneity among workers highlights the economy-wide coordination in labor supply and consumption sharing that employment lotteries and complete markets achieve in the representative family model. A high disutility of labor makes generous UI cause very low employment levels.     

Unemployment insurance: Risk sharing versus efficiency

Two models of spot labor markets are presented in which labor suppliers have heterogeneous attitudes towards effort and in which uncertainty prevails on labor productivity and growth. The problem of selecting efficient rules to manage unemployment insurance (UI) systems is considered. We show that there does not exist any system which combines an efficient allocation of labor with an efficient allocation of risks among employees, unemployed workers and capital-owners. Pareto-efficient policy rules are a best compromise between these two conflicting objectives. It implies that productive efficiency could be improved in periods of mass unemployment by reducing UI benefits. That would be at the expense of more inefficiencies in the sharing of macroeconomic risks. At the optimum, the UI benefit is positively correlated to growth and it is negatively correlated to labor productivity.     

Borrowing constraints,the cost of precautionary saving and unemployment insurance

When it is costly for individuals to save or to borrow, unemployment insurance (UI) provides an alternative source of liquidity that smooths consumption over time and leads individuals to spend longer unemployed searching for a suitable job. We show in a tractable life-cycle model how the optimal unemployment replacement ratio and the fall in consumption on job loss depend on the cost of self-insurance and the cost of borrowing. This implies that the value of UI depends on age at job loss, consumption needs (such as the presence of children), discount rates, the return on saving, access to credit and the presence of other social insurance programmes. Optimal replacement rates vary substantially with plausible variation in these factors (from less than 20 percent to almost 60 percent).     

A theory of the natural unemployment rate and the duration of employment

In this paper, a theory of the natural or equilibrium rate of unemployment is built around a theory of the duration of employment. Evidence is presented that most unemployed workers became unemployed because their previous jobs came to an end; only a minority are on temporary layoff or have just entered the labor force. Thus, high-unemployment labor markets are generally ones where jobs are brief and there is a large flow of newly jobless workers. The model of the duration of employment posits that employment arrangements are the efficient outcome of the balancing of workers' and employers' interests about the length of jobs. Full equilibrium in the labor market also requires that the rate at which unemployed workers find new jobs be efficient. The factors influencing the resulting natural unemployment rate are discussed. Under plausible assumptions, the natural rate is independent of the supply or demand for labor. Only the costs of recruiting, the costs of turnover to employers, the efficiency of matching jobs and workers, and the cost of unemployment to workers are likely to influence the natural rate of unemployment strongly. Since these are probably stable over time, the paper concludes that fluctuations in the natural unemployment rate are unlikely to contribute much to fluctuations in the observed unemployment rate.     

Unemployment and workers' compensation programmes: rationale,design, labour supply and income support

I examine the unemployment insurance (UI) and workers' compensation (WC) insurance programmes, concentrating on labour supply, insurance and income redistribution. UI and WC increase the time employees spend out of work. Elasticities of lost work time that incorporate both the incidence and duration of claims are centred at 1.0 for UI and between 0.5 and 1.0 for WC. These elasticities are larger than elasticities typically found in studies of wage effects on hours worked by men, probably because UI and WC lead to short‐run variation in wages with mostly a substitution effect and the programmes alter the participation margin. Some good evidence suggests that UI smooths the consumption of the unemployed and more clearly indicates that UI progressively redistributes resources. There is substantial evidence that injured workers suffer material hardships even with WC programmes, but research has not provided an overall picture of the insurance and redistributive aspects of WC.     

Buffer stock saving in retirement accounts

We use a dynamic programming model to explore the possibility and extent of precautionary saving in tax-sheltered accounts such as the 401(k). The main policy experiment examines the behavior of saving for different levels of unemployment insurance (UI), which is a perfect substitute for precautionary saving against job loss. Our results indicate that increasing the generosity of UI crowds out 401(k) contributions made by younger workers, who save primarily for precautionary reasons. At the aggregate level, we find that 401(k)s increase national saving and that the magnitude of the effect depends on the generosity of UI.     

Household Level Economic Incentives, Unemployment Trap and Job Finding Probability

This paper considers the sensitivity of the household's disposable income with respect to the labour market states and the labour market transitions of unemployed workers. The paper analyses the following questions: (i) which are the determinants of starting wages? (ii) how many unemployed are in the unemployment trap? (iii) how do household level economic incentives affect the conditional probability of finding a job? The empirical analysis is based on individual panel data covering the years 1987–1993 in Finland, when the unemployment rate rose from about 4% to 18%. We have estimated the starting wage equation to calculate the effects of hypothetical re-employment on the household's disposable income and to evaluate the frequency of the unemployment trap. To analyse factors affecting the transition out of unemployment to employment in open labour market, we estimate unemployment duration using a semi-parametric proportional risk model. The paper shows that the impact of the economic incentives, measured by the hypothetical change in household disposable income, on employment is more important in the recession than in the boom.     

Equilibrium matching and termination

In an equilibrium model of the labor market with moral hazard, jobs are dynamic contracts, job separations are terminations of optimal dynamic contracts. Transitions from unemployment to new jobs are modeled as a process of random matching and Nash bargaining. Non-employed workers make consumption and saving decisions as in a standard growth model, as well as whether or not to participate in the labor market. The stationary equilibrium is characterized. The model is then calibrated to the U.S. labor market to study quantitatively the worker flows and distributions, the compensation dynamics, and the effects of UI system.     

Screening and Labor Market Flows in a Model with Heterogeneous Workers

We construct a model in which screening of heterogeneous workers by employers plays a central role in determining both the flows into and out of unemployment. Following a negative productivity shock, the share of low‐efficiency workers in the pool of unemployed rises, and this composition effect reduces the incentive of firms to post vacancies, lowering job opportunities for all workers. Heterogeneity in workers’ efficiency amplifies unemployment fluctuations in economies with small gross labor flows and leads to persistent buildups of unemployment and slow recoveries. The composition effect worsens the unemployment–inflation trade‐off faced by the monetary authority, leading to very large sacrifice ratios when a fall in productivity primarily affects low‐efficiency workers.     

东北老工业基地经济转型中的失业特征分析

在经济转型过程中东北老工业基地出现了严重的失业问题,目前下岗职工再就业问题仍未从根本上解决,失业人数仍然在不断增加,新失业群体也不断出现,甚至在某些地区或行业还出现了群集现象,重点发展第三产业、民营企业、中小企业是破解就业问题的根本出路。     

Optimal taxation and welfare benefits with monitoring of job search

In order to investigate the interaction between tax policy, welfare benefits, the government technology for monitoring and sanctioning inadequate search, workfare, and externalities from work, we incorporate endogenous job search and involuntary unemployment into a model of optimal nonlinear income taxation. In this setting, the government faces a trade-off between boosting employment of low-skilled agents and raising work effort of high-skilled workers. If sanctions for inadequate search effort can be targeted at high productivity types for whom it is socially optimal to search, the government can afford to levy higher labor taxes on marginal workers without discouraging these agents from seeking work. This allows for lower marginal taxes on work effort of agents with a job. In contrast to workfare, job externalities in the private sector raise marginal tax rates, as the government attaches more importance to boosting employment of low-skilled workers.     

Unemployment insurance with a hidden labor market

We consider the problem of optimal unemployment insurance (UI) in a repeated moral hazard framework. Unlike existing literature, unemployed individuals can secretly participate in a hidden labor market. This extension modifies the standard problem in three dimensions. First, it imposes an endogenous lower bound for the lifetime utility that a contract can deliver. Second, it breaks the identity between unemployment payments and consumption. And third, it hardens the encouragement of search effort. The optimal unemployment insurance system in an economy with a hidden labor market is simple, with an initial phase in which payments are relatively flat during unemployment and with no payments for long-term unemployed individuals. This scheme differs substantially from the one prescribed without a hidden labor market and resembles unemployment protection programs in many countries.     

A quantitative analysis of unemployment benefit extensions

Extensions of unemployment insurance (UI) benefits have been implemented in response to the Great Recession. This paper measures the effect of these extensions on the unemployment rate using a calibrated structural model featuring job search and consumption-saving decisions, skill depreciation, and UI eligibility. The ongoing UI benefit extensions are found to have raised the unemployment rate by 1.4 percentage points, which is about 30% of the observed increase since 2007. Moreover, the contribution of the UI benefit extensions to the elevated unemployment rate increased during 2009–2011; while the number of vacancies recovered, the successive extensions kept search intensity down.     

How important is intra-household risk sharing for savings and labor supply?

While it is recognized that the family is a risk-sharing institution, little is known about the quantitative effects of this source of insurance on savings and labor supply. In this paper, we present a model where workers (females and males) are subject to idiosyncratic employment risk and where capital markets are incomplete. A household is formed by a female and a male, who decide on consumption, savings and labor supplies. In a calibrated version of our model we find that intra-household risk sharing has its largest impact among wealth-poor households. While the wealth-rich use mainly savings to smooth consumption across unemployment spells, wealth-poor households rely on spousal labor supply. For instance, for low-wealth households, average hours worked by wives of unemployed husbands are 8% higher than those worked by wives of employed husbands. This response in wives’ hours makes up 9% of lost family income. We also study consumption losses upon an unemployment spell, precautionary savings and the crowding out effects of the public unemployment insurance program on the extent of risk sharing within the household.     

Time inconsistency as a rationale for public unemployment insurance

A role for public unemployment insurance is developed based on the inability of the government to commit to a future rate of unemployment. This is illustrated using a model in which a minimum wage policy combined with unemployment insurance is welfare-improving. Unemployment insurance could be decentralized to the private sector if the government could commit to a minimum wage. However, if not, a government that acts in the interest of the workers will have an incentive to increase the minimum wage to exploit private insurers. In the absence of commitment, an equilibrium with private unemployment insurance will not exist.     

Labor market participation,unemployment and monetary policy

Models of unemployment and monetary policy usually assume constant participation. Incorporating a participation decision into a standard New Keynesian model with matching frictions, we show that market tightness becomes endogenously more volatile because both the opportunity cost of home production and the reservation wage vary with participation. The model can simultaneously explain the low volatility of participation, the high volatility of unemployment, and a procyclical workers׳ outside option of working. A policy of strict inflation targeting is close to optimal, and increasing the response of the interest rate to inflation does not have a large impact on the volatility of unemployment because of the endogenous response of participation.     

Taxation, Public Policy, and Dynamics of Unemployment

This paper provides an overview of the key issues relating to taxation, public policy and the dynamics of unemployment.It takes issue with the widely held view that generous social insurance schemes and the associated highpayroll taxes have been the major cause of the high unemployment rates which have persisted in Europe over thepast 15 years. It puts forward a framework for a theory of adjustment, based on the portfolio theory of the riskaverse firm and the efficiency wage theory of labor markets. This is used to explain why in the onset of a downturn,the hiring rate may lag the layoff rate, thus giving rise to rising unemployment rates. It is also shown to provideguidance as to policies which enhance the ability of firms to bear risks and which reduce costs of hiring and firing.The paper argues that while policies which increase severance or layoff costs may be well intended they mayactually serve to exacerbate the magnitude of employment fluctuations. Similarly, unemployment compensation,which is designed to ease the burden on those who are unemployed, may lead to higher levels of equilibriumunemployment. These programs can be restructured in ways which simultaneously ease the short-run burden ofthose thrown into unemployment, while reducing the adverse impact of these programs on the unemployment rate.     

Ramsey monetary policy with labor market frictions

Traditional New Keynesian models prescribe that optimal monetary policy should aim at price stability. In the absence of a labor market frictions, the monetary authority faces no unemployment/inflation trade-off. The design of optimal monetary policy is analyzed here for a framework with sticky prices and matching frictions in the labor market. Optimal policy features deviations from price stability in response to both productivity and government expenditure shocks. When the Hosios [1990. On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57 (2), 279-298] condition is not met, search externalities make the flexible price allocation unfeasible. Optimal deviations from price stability increase with workers’ bargaining power, as firms incentives to post vacancies fall and unemployment fluctuates above the Pareto efficient one.     

Interviewing in two‐sided matching markets

We introduce the interview assignment problem, which generalizes classic one‐to‐one matching models by introducing a stage of costly information acquisition. Firms learn preferences over workers via costly interviews. Even if all firms and workers conduct the same number of interviews, realized unemployment depends also on the extent to which agents share common interviewing partners. We introduce the concept of overlap that captures this notion and prove that unemployment is minimized with perfect overlap: that is, if two firms interview any common worker, they interview the exact same set of workers.     

Can an Unemployment Insurance System Generate Multiple Natural Rates?

This article studies some macroeconomic consequences of the financing of an unemployment insurance scheme. Under a balanced-budget rule, when both taxes and unemployment benefits are proportional to wages, the existence of multiple natural rates of unemployment is a generic property of the matching model. Government can lead the economy to a high equilibrium by fixing the rate of tax on wages and then setting the replacement ratio so that its expenditure matches its receipts.